The scenario: You are the CF10 compliance oversight officer of an investment intermediary firm with several advisers. Your firm has historically provided and continues to provide clients with advice on a vast range of what are now classed as retail investment products.
This has included advising clients on investment in to overseas property schemes, which typically have been unregulated collective investment schemes.
With the sale of these products effectively banned to the vast majority of retail investors, your firm now has a relatively large client holding in these investments which were initially deemed suitable for them, but are now being questioned more deeply by the board.
Following the FCA’s publication of PS13/3 (Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes), the promotion of Ucis and close substitutes, now collectively referred to as non-mainstream pooled investments will generally be restricted to sophisticated investors and certified high-net-worth individuals.
The new rules do not come in to force until 1 January, 2014 but your firm wishes to take more immediate action. The primary change in the rules is the removal of the firm’s ability to promote Ucis to people for whom it has assessed the product to be suitable. In the vast majority of circumstances Ucis are now only likely to be able to be promoted to clients who are certified as being a high-net-worth investor or sophisticated investor or a self-certified sophisticated investor, and where the firm has established that the client has the skills and knowledge to understand Ucis and the investment risks.
Following a sample review of the clients holding Ucis exposure within your firm, it is clear that some of your clients do not meet these requirements, and so could not be deemed as suitable Ucis investors going forward.
To ensure your firm is taking appropriate action there are several points to be considered:
- How can the firm continue to service the clients with regard to existing Ucis while observing the new rules but also acting in the clients’ best interests? The FCA has stated that it is preferable for customers to hear about potential replacement products as opposed to having to accept an encashment, but what if the product itself remains unsuitable?
- Does your firm’s service proposition cover advice on Ucis and are advisers ‘competent’ to advise on these products for those clients with existing exposures?
- The driver for the FCA’s new rules was the long term consistently poor outcomes being received by clients. This raises the question: have your firm’s clients suffered similar historic outcomes? Do you have an independent file review process in place? How many ‘Ucis cases’ have been reviewed? Have any generic issues arisen, have these been followed up? Ultimately the question is whether you are able to justify recommendations initially made
- The above may lead to compensation issues. Have potential compensation claims from misadvised clients been quantified?
- How involved is the board in this matter and do you have a corporate policy on how these cases should be treated going forward? Should you proactively be looking at past business carried out to help determine a way forward? This is especially relevant if Ucis would not now be an investment on which your firm would provide advice.
- Does your firm rely on, or has it ever relied on the one-off promotion exemption under Promotion of Collective Investments to promote a Ucis? While this technically remains a possibility, firms should have regard to the FCA’s client best interest rules as well as the principles for businesses. Bearing in mind the new rules, it would be unlikely that one-off promotions would be in the client’s best interest.
Simon Collins is managing director at RGP Compliance